Charlie Weston: PCP car finance deals could be a sub-prime mess all over again

Charlie Weston: PCP car finance deals could be a sub-prime mess all over again

Independent.ie

Thousands of people are set to take delivery of 2017-registration cars this week. Many of the finance deals behind the new wheels will be personal contract plans (PCPs). These PCPs are popular because the interest rates are very low, and monthly repayments are manageable.

Thousands of people are set to take delivery of 2017-registration cars this week. Many of the finance deals behind the new wheels will be personal contract plans (PCPs). These PCPs are popular because the interest rates are very low, and monthly repayments are manageable.

But a key aspect of a PCP is the need for the car to retain its agreed value at the end of the three or five-year deal. A surge in cheap imports from the UK, due to sterling's Brexit-induced collapse, means many PCP deals may bomb out.

Also, the sheer volume of PCP deals being done at the moment means that there will be huge numbers of cars on the market when it is time to take out a new deal.

All this means that PCPs could be the next lending bubble, akin to that sub-prime crisis that hit in 2008.

PCPs are a modern twist on the old hire purchase agreement.

You pay a deposit, which is typically between 10pc and 30pc of the value of the new car.

You then make monthly payments, which will usually be for three years. At the outset you agree the number of kilometres you are going to clock up over the period of the agreement.

If you keep to this, the car will have a pre-agreed value at the end of the deal, known as the minimum guaranteed value, sometimes called the guaranteed minimum future value (GMFV). At the end of the three years you have a number of choices. You can buy the car outright for the guaranteed value agreed at the start. Alternatively, you can hand back the keys and walk away.

The option that most people take, and the one the dealer will be hoping you opt for, is to exchange the car for a new model. You finance this with a new PCP deal.

The key is that the agreed minimum value at the end of the term of the deal is sufficient to cover the final payment. And, crucially, there would be enough value in the car to include an amount of "equity", which can act as a deposit on the next vehicle. This assumes you roll over your agreement into a new one, which most customers are expected to do.

However, if the value of the car falls below the agreed amount at the start of the deal, then the equity will disappear. You could end up with no deposit at all for your next car.

Fine, you can walk away from the deal, but you will have nothing out of the PCP to put towards your next motor, and no car. Motor experts warn there is likely to be a glut of three-year-old cars as recent PCP deals mature.

This is likely to push values down, meaning many cars bought with PCPs will be below their guaranteed minimum future values.